How Not-For-Profit Organizations Can Reduce Fraud

You take a lot of pride in your not-for-profit organization and its mission—and you inherently trust the employees you've hired to ensure that your organization's mission and values are carried out in everything you do. Unfortunately, employees and volunteers aren't always as honest as they may seem, and fraud can occur.

With a better understanding of what not-for-profit fraud looks like, how it could affect your organization, and the proactive steps you can take to prevent it, you can keep your mission alive and your values protected.

What Is Not-For-Profit Fraud?

Fraud in a not-for-profit organization can manifest in many ways, with some common examples including:

• Insider fraud or embezzlement, which occurs when workers or employees steal money directly from the organization.
• Manipulation of financial statements, or falsifying reports to mislead donors about how funds are used or to hide other financial discrepancies.
• Fundraising scams, which most often occur externally rather than internally—but are still worth mentioning because of how common they have become.
• Misappropriation of assets, which includes theft of cash or physical goods.
• Vendor fraud, or submitting fraudulent invoices to steal money from the organization.

Potential Consequences of Fraud for Not-For-Profits

Unfortunately, not-for-profit fraud can have serious and long-term consequences for organizations when it occurs. This includes not just financial loss, but regulatory and reputational issues as well.

Financial Loss

According to a global study, the average financial loss for a not-for-profit facing a case of fraud was $639,000 in 2020. This is an amount that many not-for-profits simply cannot afford to lose. Whether through embezzlement, misappropriation, or insider fraud, these actions directly affect an organization's finances—sometimes to the point that they are unable to recover.

Added Investigation Expenses

In addition to direct financial losses from fraud, not-for-profits can also incur other expenses related to fraud. For example, when internal fraud is suspected, organizations may need to bring in outside experts in the form of lawyers and forensic accountants to investigate the case. Although important, these services still come at an additional expense that can add to the financial loss.

Higher Insurance Premiums

After a case of fraud has occurred within an organization, liability insurance rates for the organization could also increase significantly. In some cases, insurance companies may even drop coverage—and organizations that have suffered from fraud may have a hard time finding another insurance company to cover them.

Regulatory Challenges

Some cases of fraud in certain industries may even necessitate involvement from government auditors or other regulatory agencies. This regulatory scrutiny can lead to additional oversight challenges and logistical challenges for not-for-profits, taking their attention away from furthering their core mission.

Loss of Public/Donor Trust

In instances where a case of internal fraud goes public, this can have a huge impact on the affected organization's reputation. Public trust can be decimated by fraud, even when allegations are found to be unsubstantiated. As a result, donors may stop contributing to the organization and the public might wane in their support—both of which can be devastating to any organization that relies on donations and/or volunteers to operate.

Employee Retention Issues

Finally, not-for-profits should consider the potential impact that a fraud case could have on their own employee morale and retention. When negative publicity occurs as a result of an internal fraud case, employees may feel demoralized and may even choose to leave the organization.

How Nonprofits Can Reduce Their Fraud Risk

The good news? There are some proactive steps that not-for-profit leaders can take to reduce the risk of fraud within their organizations. For starters, leaders should ensure that strict internal policies and controls are not just in place—but consistently enforced. This, in addition to limited access to organizational payment tools (such as credit cards and checks), can mitigate fraud risk.

It's also a good idea for not-for-profit leaders to get into the practice of reconciling bank accounts regularly. Ideally, this should be done by somebody who does not handle payments, as this allows for a more objective viewpoint and increases the chances of suspicious activity being flagged.

The Final Word on Preventing Not-For-Profit Fraud

Although fraud can have a major impact on not-for-profit organizations, preventing it doesn't have to be complicated or costly. By following a few common-sense tips for preventing or even spotting signs of fraud sooner rather than later, not-for-profit leaders can do their part in keeping things running smoothly.

If you have any questions or would like additional information, please contact our fraud prevention team.