Proper Nonprofit Financial Management Helps Prevent Fraud

nonprofit-financial-management-prevents-fraudWe hear about all kinds of fraudulent activities that are happening throughout the world and in various industries on the news. Unfortunately, even nonprofit organizations can commit fraud in a variety of ways. The heart of most fraudulent activity amongst these organizations stems from dishonest or improper nonprofit financial management. It can take the form of payroll or billing schemes, undocumented funds, fabricated or invented expenses, and more. No matter what, fraud is a violation of trust. In order to keep the trust the public has in nonprofits, it is important to prevent fraud within your organization. Keep reading below to learn more about how to do this. In addition, visit here to learn more about improving your organization’s transparency which is another useful way to prevent fraud.

How can your organization prevent fraud? Here are three tips for doing just that.

  1. Use internal controls to detect fraud instead of relying solely on external audits. It is quite easy for nonprofits to rely on external audits to provide recommendations and evaluate internal controls while also identifying fraud risk. Contrary to popular belief, audits are not designed to detect actual fraud. External audits are actually quite inaccurate when it comes to revealing fraud, and you are twice as likely to find fraud by accident as you are to find it as a result of an audit. There is no substitute for strong internal controls to both reduce the opportunity for fraud and to detect fraud more quickly if it occurs. Because internal controls are such an important part of detecting fraud, you don’t want to have any loopholes in your systems of management. This means being sure you have accounting software for nonprofits that is effective and being used organization-wide. More fraudulent activity occurs without transparency. If you are still relying on paper or basic accounting software that opens the door to less financial reporting needed or opportunities to leave things unaccounted for that will go unnoticed, consider updating your nonprofit accounting software. One such software is Abila MIP Fund Accounting. RBP Methods would be happy to help you explore this and other software options for your organization.
  1. Educate your staff about fraud through training. Staff members should be trained and educated on what actions constitute fraud, how fraud can harm the organization and its mission, and how to report questionable activity. This training has minimal cost and is highly effective.For starters, educate employees on the three common forms of fraud:
  • Asset misappropriation an employee steals or misuses the organization’s resources. Examples include, but are not limited to, theft of cash or checks, false billing, vendor fraud, and inflated expense reports.
  • Corruption schemes– an employee, for their personal benefit, misuses their influence in a business transaction in a way that violates their duty to the employer such as through bribery and conflict of interest transactions.
  • Financial statement fraudan employee intentionally causes a misstatement or omission of material information in the organization’s financial reports. Recording fictitious revenue, understating expenses, and reporting artificially inflated asset values are all part of this. Again, this is why updated and live nonprofit accounting software is so important because it makes it quicker to detect discrepancies when all employees have access to this shared and timely information.
  1. Remember that the board plays a role as well. Don’t overlook the board. The board of directors is still responsible to help monitor and supervise finances and operation even if they are not present on a daily basis. They have an important say in financial control procedures and policies. They also have a responsibility to act if fraud is detected through investigation, creating action steps, and reporting of the incident. Board members are responsible for acting with due care and putting the best interests of the organization first. In some cases, board members have been held liable when it was determined they were negligent in fulfilling their fiduciary duties of care, loyalty, and obedience.

Understanding More about the Threat of Fraud:

Both damaged trust and damaged finances can result from fraud and therefore cause a substantial issue for nonprofits. What is even more striking is that, generally speaking, most organizations that fall victim to fraud do not recover any of their losses. Where does this fraud come from in the first place? Employees of varying ages that receive varying salaries are all susceptible. However, fraud committed by managers or executives takes twice as long to detect as compared to non-management employees. It is important to be on the lookout for fraud at all levels and assume no one is exempt.

RBP Methods can assist you in getting your financial practices in order and using nonprofit accounting software to ensure that your finances are properly maintained and recorded leading to reduced risk of fraud. Please contact us to learn more.