While fraud is certainly no walk in the park for any business or organization, its impact on smaller nonprofit organizations can be particularly devastating. Because they don’t have the tools and resources to quickly bounce back from any kind of loss, small nonprofits must take preventative measures to protect themselves in the case of fraud. Common types of fraud in the nonprofit sector include employee embezzlement (paying fictitious vendors or stealing organization checks), related party transactions, and the abuse of travel and/or credit privileges. While there is no set “environment” for fraud, a culture of trust, weak internal controls, lack of segregation of duties, significant control by executives and board members, and limited resources can certainly put your organization at risk for fraudulent activities.
Over the past few months, we’ve discussed the importance of establishing internal controls for your nonprofit organization and have even provided you with several tips to help you implement key internal controls within your organization. One key practice in the fight against fraud is the separation of duties. While this is certainly a best practice for all types of nonprofit organizations, smaller nonprofits may have a more difficult time separating out key financial tasks. With that in mind, here are four practical ways your smaller nonprofit can protect itself against fraud:
- Review your expense reports and credit card statements on a regular basis. Keeping an eye on expense reports and credit card statements can help you identify fraudulent charges and take corrective action before it’s too late. Make sure that you assign this task to someone who is not involved in the processing of these reports. The purpose of this review is to ensure the validity of business expenses and maintain the proper policies and procedures when it comes to employee spending.
- Show no favoritism. By this we mean that everyone in your organization should be required to follow the same rules and procedures. Executives should not be exempt and – in fact – play a very critical role in setting the tone for the entire organization.
- Implement a new vendor selection process. You should have strict policies in place regarding new vendors and the payment of new vendors. If you aren’t familiar with a vendor in your system, due your research. Determine how the vendor was selected and if the selection followed your organization’s policies. For significant vendors, it may be a good idea to involve management and perform a due diligence check.
- Establish compensation-related controls. In order to reduce the risk of payments to false vendors and/or unauthorized payments from the organization’s checkbook, you need to verify all checks issued by the organization with the bank and review bank statements regularly. Work closely with your bank to identify discrepancies or suspicious checks – it could prevent major loss!
You can’t stop fraud from happening entirely, but you can do the work to safeguard your organization and reduce the risk of fraud. In addition to these tips, Abila MIP Fund Accounting (formerly Sage 100 Fund Accounting) has released new fraud preventative features in their newest software upgrade: Version 2014.6. These new features are designed to help you detect fraudulent activity so you can protect your organization’s reputation and ensure the money that is donated to you remains in safe hands. With new enhancements, such as alerts about suspicious activity or significant changes in the accounting system, custom payroll vouchers and easy visibility, it’s easy to see why so many organizations are choosing to upgrade. If you’d like to learn more about how Abila MIP Fund Accounting can help you safeguard your organization against fraud, give us a call today at (503) 648-9051.