How safe is your nonprofit? Part 1: What is fraud?

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.

This week: We’re talking about financial fraud. At this particular time, while nonprofits may be focused on adjusting to a new working environment or facing potential funding challenges; individuals may be facing personal financial hardships. Phishing attacks are at record high levels, meaning the importance of securing your organization against fraud is critical.

What is fraud?

We define fraud as any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means. There are two types of financial fraud: the misappropriation (theft) of assets, which is the most common; and fraudulent financial reporting.

How big a problem is it?

In its 2014 Report to the Nations on Occupational Fraud and Abuse, the Association of Certified Fraud Examiners (ACFE) estimated that organizations lose up to 5% of their annual revenue to fraud, with the median loss to nonprofits estimated at $108,000. Smaller organization’s losses may be relative when compared to the median, but it’s still damaging. Imagine if your nonprofit budgeted 5% of your annual revenue for fraud loss!

So, why are nonprofits targeted?

A wide range of studies show that nonprofits may be at a higher risk for the occurrence of fraud than for-profit organizations.

• Governing boards are often composed of volunteers who lack expertise in their financial management
• Directors of nonprofits frequently lack the skills for effective financial management
• Daily financial management is frequently under the control of a single individual who isn’t otherwise subject to rigorous financial controls and oversight
• Executives who are passionate about their missions are naturally trusting of others who share their interest – or those who pretend to
• Revenue streams can be difficult to control or verify

Common misconceptions

We discuss the issue of fraud with our nonprofit clients regularly, often being asked the same questions from our clients. So, we’ve listed some of the most common statements/questions and have answered them below.

“It hardly ever happens to nonprofits, so we don’t have to worry that much.”

It is much more common than you might think. Instances of fraud in nonprofits are often kept quiet for a variety of reasons. Beyond the immediate financial loss, there is also reputational damage that can occur, which would worry donors, grantors, or other public audiences.

“Mr/Mrs. X is the most dedicated, honest, sweetest person I’ve ever met.”

They probably are, and you’ll likely trust them immensely because of this, but the only people who steal are people we trust – if we didn’t trust someone, we wouldn’t give them the easy opportunity to steal.

“Everyone who works here is a really good person.”

People who do bad things don’t think of themselves as bad. More often than not, fraudsters have convinced themselves that they are just borrowing the money temporarily, making up in a small way for perceived under-paid work, or even fulfilling the organizational mission!

“We don’t have enough staff to have adequate financial controls.”

This is the most common statement we hear, and it simply isn’t true. Even the smallest of nonprofits can set in place very basic internal controls.

“Audits catch embezzlement and fraud. We have a clean audit every year so we don’t have to worry.”

Auditors explicitly state that an audit is neither designed to find fraud, nor an assurance that there was none. Auditors do catch embezzlers, but it’s very hard to catch fraud that involves two employees acting in collusion, or a junior person going along with a senior person’s misdeeds (either knowingly or unwittingly).

Hopefully, this article has made you aware of fraud, and why it could be a problem in your nonprofit organization.

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. Concerned about more than just fraud? Be sure to check out our latest webinar, “5 Most Common IT Vulnerabilities” here.