May 14, 2024 •HoganTaylor
According to the Association of Certified Fraud Examiners' (ACFE's) Occupational Fraud 2024: A Report to the Nations, nonprofits seem to fare better than their for-profit counterparts with roughly half the median loss per fraud scheme - $76,000 vs. $150,000. Although that may sound like good news, even minimal losses can have significant repercussions for organizations operating on tight budgets. The imperative for nonprofits, therefore, is not complacency but proactive action to mitigate risks and safeguard their assets.
Stakeholder Training
One glaring vulnerability highlighted by the 2024 ACFE report is the low implementation rate of fraud awareness training among nonprofits. Shockingly, only 52% of staffers and 49% of management receive such training, compared to 82% and 81% in public companies, respectively. The correlation between lack of training and increased financial losses underscores the importance of robust training programs.
To fortify your nonprofit’s defenses, integrate fraud prevention and reporting instruction into the orientation process for new staffers, executives, and volunteers with financial responsibilities. Regular refresher courses should also be provided to existing employees. Trained personnel are twice as likely to detect and report fraudulent activities, significantly reducing the organization's vulnerability.
Moreover, extending awareness beyond internal stakeholders to clients and vendors can serve as an additional line of defense. Establishing accessible reporting channels, such as anonymous hotlines or web portals, fosters a culture of vigilance and accountability, and is associated with a 50% reduction in the cost and duration of fraud schemes.
Enhanced Financial Oversight
While nonprofits typically conduct annual or semi-annual financial statement reviews, the prolonged intervals between assessments heighten the risk of undetected fraud. Adopting a more frequent review schedule, ideally quarterly or even monthly, empowers leadership to promptly identify irregularities and take corrective action.
In addition to formal financial statement reviews, regular budget reports should be disseminated to board members, highlighting variances between projected and actual figures. Significant deviations often signal potential fraudulent activities, warranting closer scrutiny and investigation.
Segregation of Duties
The principle of segregation of duties remains a cornerstone of effective fraud prevention across all organizational types. By distributing responsibilities across multiple individuals, nonprofits can establish checks and balances that deter fraudulent behavior.
Ideally, no single individual should have unchecked control over key financial processes. For instance, individuals with access to assets should not be responsible for their accounting, and those initiating transactions should not have sole authority to approve them. Implementing this principle may require innovative solutions; such as outsourcing certain functions, assigning duties to board members, or leveraging cloud-based tools to facilitate remote collaboration.
Other Controls
Credit cards have become increasingly common in nonprofits. However, they come with the risk of unauthorized usage. If you give credit cards to staff, board members or volunteers, limit the number of cards in use. You should also require a receipt for each purchase (along with documentation of the business purpose). Someone who isn't an authorized card user should scrutinize card statements and supporting documentation monthly.
Additionally, a mandatory vacation policy (generally associated with a 23% reduction in losses) can be extremely beneficial. Required time off helps prevent would-be fraudsters from hiding their schemes from colleagues. An unwillingness to share duties or take vacation are some of the most common red flags for fraud.
Adapting to Evolving Threats
As nonprofits evolve and adapt to changing circumstances, so too must their fraud prevention strategies. Factors such as workforce reductions, increased reliance on volunteers, or high-profile fundraising events can introduce new vulnerabilities that demand proactive mitigation measures.
Although nonprofits may not suffer as greatly from fraud in terms of monetary losses, it's important to safeguard against such risks. By prioritizing stakeholder training, enhancing financial oversight, implementing segregation of duties and adapting to evolving threats, nonprofits can fortify their defenses and uphold their commitment to transparency, accountability and mission-driven impact.
How HoganTaylor Can Help
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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