Nonprofit Accounting Best Practices to Deter Fraud part 1

accounting for nonprofits

Each year organizations suffer losses of approximately 5% due to fraud. Fraud is most often committed by staff in accounting, operations, sales, executive, customer service, and purchase & finance department. All too often, smaller organizations are at a higher risk as their  size limits their ability to staff a team which will implement and revise internal controls to keep them safe.

The good news is there are ways to help reduce your risk for fraud. Nonprofits can implement prevention measures that range from hotlines for anonymous tips reporting suspicious activity to regular training on what constitutes fraud and how it affects everyone within the organization.

What does a fraud perpetrator look like?

In short, they look like you and me. Most white collar criminals are talented, highly educated, stable, individuals. However, there are some red flags to look for to detect fraudulent activity. Some common behavioral red flags include:

  • Living a lifestyle beyond their means
  • Financial hardship
  • Scarcity mentality (unwilling to share knowledge or data)
  • Family problems
  • Addiction
  • Reluctance to take vacation/time off

Computer Fraud

Another risk for companies is computer fraud. Using a computer to commit fraud can be much more difficult to detect than other crimes. Additionally perpetrators are able to get away with stealing more money in less times with less effort. Computer fraud can be more challenging to detect than other types of fraud. Unfortunately, computer systems are vulnerable to crimes that can go undetected until it’s too late. There are many reasons why computer systems are so vulnerable to fraud. The sheer volume of data that is stored on a company system make it difficult to establish perfect controls and protections. Additionally, many people need to access information in order to service customers and perform the functions of their jobs. However, it is still necessary to protect against computer fraud as best as you can. In fact, it is estimated that at least one incident of computer fraud has effected every U.S. business.

Computer Fraud Prevention

Creating a climate that will reduce your risk for fraud is the best thing your organization can do in order to protect yourself and your employees. Making fraud more difficult to commit, improving methods of detection, education, and policy are all necessary steps to take. Consider the following in order to make fraud less likely to occur:

  • Establish a company culture that emphasizes integrity and high ethical values.
  • Ensure that internal controls have been established that act as a deterrent to any potential fraud.
  • Create accountability by assigning authority and responsibility to specific departments and individuals.
  • Develop security policies and communicate them to your employees.
  • Create a company code of conduct,
  • Establish effective supervision with checks and balances.
  • Offer training on ethics and integrity
  • Establish a strong system of internal controls
  • Implement segregation of duties
  • Establish physical and remote access restrictions

In the unfortunate event that fraud has occurred in your company you will want to maintain the following in order to reduce potential losses.

  • Obtain adequate insurance
  • Establish a fraud contingency plan
  • Maintain backups of all program and data files
  • Monitor your systems activity with software

Today we have looked at ways to identify your business risk for fraud and some strategies you can implement to deter fraudulent activity before it occurs. Take a look at part two of this blog where we dive deeper into computer attacks and social engineering as well as ways to keep computers virus-free.