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Six Signs Your Nonprofit Is Ripe for Fraud

 

Broken_Piggy_Bank.jpgWe in the nonprofit sector don’t like the “F” word … fraud, that is.

After all, we’re in the business of doing good, and fraud is just bad and ugly. However, turning a blind eye to the possibility can be even more damaging than the actual deception.

Consider this: Of those who responded to the Association of Certified Fraud Examiners’ 2016 Global Fraud Study, 10.1 percent of victim organizations were nonprofits that reported a median loss of $100,000; 18.7 percent were government agencies that reported a median loss of $109,000.

Is your nonprofit ripe for fraud? If we’re being totally honest, it probably is, particularly if any or all of the following scenarios sound familiar:Your team members are wearing too many hats – The need to do more with less is a strong trend that emerged from Abila’s Nonprofit Finance & Accounting Study. The top three finance/accounting trends identified by all participants, regardless of organization size or respondent age, are: 1) small, lean finance teams; 2) cross-functional expertise for all staff; and 3) key decision makers for technology, software, and services reside inside finance.

In addition to feeling pressure to perform on multiple fronts, nearly half of the nonprofit finance and accounting professionals who responded to the survey identified interruptions from other departments as the number one most common challenge they face on a daily basis.

Lots of conflicting responsibilities compounded by lots of interruptions can make an otherwise attentive, detail-oriented professional very unfocused and unaware. 

Your nonprofit experiences high employee turnover

Overall turnover rates in the nonprofit sector increased to 19 percent in 2014 compared with 16 percent in 2013, according to the latest 2015 Nonprofit Employment Practices Survey.

Employee turnover was identified as a top organizational trend in the Abila Nonprofit Finance & Accounting study, with a whopping 87 percent of respondents saying it’s problematic.

Let’s face it: The pay is lower (while expectations and responsibilities are higher) in the nonprofit sector than the for-profit, and consequently, the sector is often viewed as a stepping stone in one’s career.

Training is a luxury

Who in the nonprofit sector has time (or budget dollars) for professional development? In fact, a ProInspire survey of nonprofit managers revealed that, despite demand for professional development programs, such offerings are scarce and access is limited in the sector, reports the HuffPost Impact.

Nine out of 10 nonprofit managers indicated interest in leadership or managerial training, and believe that it will make them more effective in their roles, yet only half of them have received such training since assuming a role managing direct reports.

What’s more, only 39 percent of respondents said their organizations pay for leadership or managerial training. The logic is pretty simple here: less training, equals less competence, equals less awareness, equals more risk.

You have limited or ineffective controls in place 

Internal controls are the financial processes and procedures that enable an organization to safeguard its assets, as defined by the Greater Washington Society of CPAs. The goal of internal controls is to create business practices that serve as “checks and balances” on staff (and sometimes board members) or outside vendors to reduce the risk of misappropriation of funds/assets, says the National Council of Nonprofits.

Unfortunately, there are many nonprofits, particularly smaller organizations, that run an informal shop and don’t have prescribed controls in place. And, even if they do, they often allocate very limited resources to monitoring, enforcing, and updating them.

There are volunteers working at your nonprofit who are privy to confidential information 

Often, these volunteers have very little oversight and considerable responsibilities.

Your volunteer board has little-to-no financial oversight expertise 

Members of your board of directors may be well-connected in your community; they’re likely very passionate about your cause; and, they may even be good fundraisers. However, your financial infrastructure might be far too complex for most board members to fully understand. Or, it could be they simply don’t understand your operations well enough to ask good questions about patterns, trends, risks, and controls. 

For a deep dive into nonprofit fraud, its potential consequences, and how you can protect your organization from its damaging effects, check out “The Perfect Storm: Protecting Your Nonprofit from the Devastation of Fraud,” which I co-wrote with Dena Jansen, CPA and Nonprofit Audit Partner at Austin Texas-based accounting, tax, and consulting firm, Maxwell Locke & Ritter.

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The preceding is a guest post by Dan Murphy, Product Manager for Abila MIP Fund Accounting™. He has a background in nonprofit financial management, with degrees in finance and accounting and more than 10 years of nonprofit accounting experience.

Topics: nonprofit infrastructure Fraud