Fraud Risk Is High for NFPs

Who would steal from a not-for-profit (NFP)? Fraudsters embezzle from banks and manufacturers, but who would take money from organizations that aim to make the world better? Unfortunately, a lot of people, according to the Association of Certified Fraud Examiners (ACFE). The ACFE’s biannual Report to the Nations on Occupational Fraud and Abuse demonstrates that NFPs are at a high risk of fraud.

The ACFE researched more than 2,400 frauds for the most recent report. NFPs represented 10.1 percent of the cases studied and suffered a median loss of $100,000 (see below).

©2016 Association of Certified Fraud Examiners, Inc.

 

What types of frauds are occurring?

According to the ACFE, NFPs most frequently suffer from billing, check tampering, corruption and expense reimbursement schemes (see below).

©2016 Association of Certified Fraud Examiners, Inc.

 

NFPs also see large numbers of payroll, noncash and cash-on-hand thefts, so there are many ways fraudsters can steal the organization’s money.

While expense schemes are popular, NFPs face some unique risks. For example, if donors provide a check or cash to an organization and someone provides them with thank-you letters or notes signifying receipt of the donation, who knows whether those checks or cash made it to the organization’s bank? Unlike in other industries, NFP donors typically don’t expect to receive a service or good. They don’t provide a purchase order and won’t ask for an invoice. This lack of a paper trail means fewer people are “in the know” regarding transactions. Some companies use lockboxes for cash receipts to ensure the person responsible for opening and recording cash receipts isn’t responsible for depositing them into the bank account. This typically isn’t true with NFPs, since many receive money through various means. Organizations are understandably reluctant to make donating more difficult. After all, more payment methods provide a higher likelihood of receiving a donation. However, having more methods and fewer people involved in receiving, recording and depositing donations creates an environment ripe with fraud opportunity.

What can an NFP do?

Don’t assume this won’t happen to you and your organization. Sticking your head in the sand isn’t a fraud mitigation policy—it’s one of best ways to enable fraudsters. We recommend NFPs consider these ways to address fraud risk now and in the future:

  • Establish fraud and whistleblower policies and regularly talk about them.
  • Establish a third-party anonymous hotline. The main way frauds are detected is through a tip, and an anonymous hotline is the best way to get tips.
  • Perform a fraud risk assessment. Determine where money could be improperly leaving the organization—or never making it to the organization—and find ways to mitigate those risks without sacrificing operational efficiency.
  • Monitor, monitor, monitor—and let employees know you’re monitoring. The threat of detection is the best deterrent. Monitoring can take on many different forms, including proactive data analytics, continuous analytics, textual analytics, fraud awareness training, surprise rotations, etc.

BKD’s forensics team can help answer questions regarding fraud risk and strategies to manage it. For more insights into fraud prevention and detection, visit our blog at bkdforensics.com.

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Bryan specializes in providing litigation consulting, fraud investigation and forensic accounting services. He has extensive experience in providing litigation support and forensic services for a variety of industries including multiple Fortune 500 companies. In addition to being a CPA, Bryan holds the Certified in Financial Forensics certification from the American Institute of CPAs and also is a Certified Valuation Analyst and Certified Fraud Examiner.

Bryan Callahan – who has written posts on BKD Forensics.


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