The average nonprofit fraud loss averages around $600,000, according to the NonProfit Times. With so much at stake, understanding your fraud IQ is important. How much do you know about nonprofit fraud?
Principles of Fraud Risk Management
The principles of fraud risk management include:
- Fraud risk governance: Establishing and communicating a fraud risk management program demonstrates expectations to all stakeholders. A written program which can be shared is a great idea.
- Fraud risk assessment: This includes items such as employment checks, ensuring people take vacation time and more.
- Fraud control activity: Selecting, developing, and deploying fraud risk management activities. A good example is a set of internal controls.
- Fraud investigation and corrective action: Establishing a communication process to investigate and correct any suspected fraud. Also includes a written, established and coordinated approach to the investigation.
- Fraud risk management and monitoring: Every organization should select, develop, and perform ongoing fraud risk management evaluations. Look at these five principles and see how they apply throughout the organization. Any gaps should be addressed immediately.
Data can, and should, be used throughout all of the fraud risk assessment and analysis activities. As we’ve shown in a previous article, Benford’s Curve is one example of how data can be used, albeit a simple use, to indicate possible fraud. CPAs, auditors, and others can use more sophisticated techniques to detect errors and fraudulent activities.
Whose Responsibility Is It, Anyway?
Who on staff is responsible for fraud detection, management, and corrective actions? Your senior management team is ultimately responsible for all of these actions. The Board of Directors provides oversight and guidance, but the “buck stops” at the desk of your senior leadership team.
Fraud Risk Assessment
Fraud risk assessment includes considering all potential routes of fraud. This includes internal and external areas at risk as well as personnel who might have access to materials which enables them to commit fraud.
Even with the best risk assessment and controls in place, it may be impossible to prevent all types of fraud. It is still critical for nonprofit organizations to have fraud risk assessment measures in place, internal controls, and other measures enacted to prevent, limit, and detect fraud.
Stopping Fraud Starts with You
Much is at risk when it comes to nonprofit fraud. It’s not just the potential loss of $600,000 or so, which is, of course, a substantial number. It’s also the risk of losing the trust and faith of the public.
Nonprofit organizations are under heavy scrutiny now from a public who has grown weary of extravagant spending. People want to donate to their favorite charities, causes, and membership organizations, but they won’t do so if they feel their money is wasted. Fraud is one example of waste that many donors feel can be prevented.
Your organization works hard on behalf of its members, donors, and beneficiaries. Ensuring that you take all necessary steps to prevent fraud and detect it if it occurs is essential to building and keeping the public trust.
For more information on fraud prevention, see:
- Evaluate the Internal Controls at Your Organization
- Putting the Tools in Place to Proactively Detect Fraud
- How Abila Fund Accounting Helps You Detect Fraud
About Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.