Practical Fraud Prevention–plugging the leaks

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

My mom makes sure to turn out every light before leaving her apartment.  I’ve seen her do it every time.  She doesn’t even pay for electricity, it’s just the right thing to do.  How far are you willing to go to safeguard resources?    I bet you make sure not to leave the water running, and not to leave the stove on.  You certainly wouldn’t leave the house without locking the door.

So why would that change when you get to work?  You make sure you make sure your programs meet relevant standards, you make sure your nonprofit complies with the law, and you certainly wouldn’t leave the checkbook out unattended. 

Yet too often, nonprofits fall victim to wasteful embezzlement, estimated to drain 5% of each nonprofit’s annual budget every year. *  What’s 5% of your budget?  What’s behind this dynamic?

We shouldn’t be that surprised.  Nonprofits often operate on a shoestring.  With a small staff and a tight budget, they don’t direct a lot of resources to fraud prevention because it takes away from the mission.  

In addition, nonprofits employ some of the nicest people around.  Dedicated to the mission, nonprofit leaders tend to assume that everyone is just like them.  They’re sure “it can’t happen here”.  When the fraud perpetrator turns out to be the long time trusted employee, everyone is shocked.

Yet these aspects of the nonprofit environment are just what put the small nonprofit at risk.  Fraud researchers tell us that fraud occurs when three things are present:  opportunity, need and rationalization.  Think about the small nonprofit where one individual handles most or all of the finance function.  There’s the opportunity.  Think about the small nonprofit where everyone does more with less.  That overworked and underpaid individual could rationalize a few personal charges, a personal loan or even a fraud scheme.  Add a personal crisis, some hard times at home, and there you have it, the perfect storm for embezzlement, right in your own little nonprofit.  It can happen here.

What can we learn?

A lot of nonprofit leaders give up on fraud prevention before seriously considering what they can do.  You’d never do that at home.  Today, there are more opportunities than ever to plug potential leaks and safeguard your nonprofit’s resources.  Here are some of the most effective things you can do to tighten up your organization’s fraud prevention:

Review bank activity online for unauthorized payments.  Don’t wait for payments to be brought to you for approval.  Log in and see what’s going through your bank account.

Pay attention to payees.  Fake vendor schemes are one of the most frequent frauds.  Read about the DC administrative assistant who was able to steal more than $5 million by getting checks written to fake vendors that she controlled in Invoice for Your Approval… 

Use online banking with two levels of permission.  One person can prepare the payments but it takes a second person to release them.  This is a lot safer than paper checks.  Read about the bookkeeper who stole more than $300,000 from a Sacramento small business using altered checks in Pay to the Order of

Control incoming checks.  A perpetrator doesn’t have to make fraudulent payments if he or she can just lift a few checks as they arrive.  Believe me, they can cash them.  Read about the Charleston, WV office manager who stole $1.5 million by skimming incoming checks in Spare Change.

Review payroll online.  Don’t wait for payroll to be brought to you for approval.  Just log in and see who’s getting paid.  Be sure pay stops for terminated employees and be sure you recognize the name of everyone on the payroll.  Read about the Honolulu payroll clerk who stole more than $220,000 using fake employees in Do you have ghost employees?

Write a code of conduct.  It’s free, it communicates what’s expected and it empowers employees to speak up.  The Association of Certified Fraud Examiners says a code of conduct can cut fraud loss by half. *

There’s more you can do.  To help, we’ve put together an online on-demand webinar, Fraud—You just lost $1 million.

Learn more about fraud prevention in these free FIT! TIPS about:

The profile of a fraud perpetrator, Façade for Fraud?

Fraudulent charges, Seven ways employees steal through expense reimbursements

Warning signs, Fraud Flags? 

Read more FIT! TIPS.

Join our 501(c)(fit!) community for free weekly FIT! TIPS, so you won’t miss another FIT! TIP.

*Yes, it’s true, per the Association of Certified Fraud Examiners Report to the Nations on Occupational Fraud and Abuse 2016 Global Fraud Study.

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