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July 11, 2011 | last updated December 1, 2011 2:13 pm

Fraud alert | Tips and resources to protect your nonprofit organization

Founding partner, The CPA Solution in Bangor

Fraud cases can often precipitate high-profile media coverage, which, unless managed carefully, can be extremely damaging to a nonprofit organization's credibility and reputation in the community. Maine recently experienced three of these within the nonprofit community: the Maine Trial Lawyers Association, the Maine Island Trail Association and the union representing workers at Narraguagus Bay Health Care Facility in Milbridge collectively reported nearly $300,000 lost to alleged employee embezzlement. What does this tell us? That even the best-run nonprofit and for-profit organizations with extremely diligent policies in place can be victims of fraud. In its 2010 report on occupational fraud, the Association of Certified Fraud Examiners estimated the median loss to an organization through employee theft was $160,000 and took 18 months to detect. The report also notes smaller organizations are disproportionately victimized by occupational fraud because they often lack the controls of their bigger brethren.

But there are a number of practices nonprofits can implement to significantly reduce their exposure. I have provided training on this and other financial management topics for the Maine Association of Nonprofits. Here are some facts about fraud, as well as some tips on how to avoid facing it in your nonprofit:

Fraud: How widespread is it?

  • Most fraud is perpetrated because the fraudster feels the risk of getting caught is very low
  • Only 7% of fraudsters have prior convictions and only 10% have been terminated by a prior employer for fraud-related conduct
  • The same ACFE report cited above indicated that fewer than 5% of the frauds reported were detected by an external auditor
  • Types of fraud include asset misappropriation, financial statement fraud, skimming, cash larceny, check tampering, billing, payroll, expense reimbursement and non-cash larceny
  • The primary internal control weaknesses highlighted in the ACFE report were: 38% lacked proper internal controls; 17.9% lacked management oversight; and 19.2% overrode existing internal controls

How to prevent it

People facing issues such as family illness, addiction or mounting unpaid bills often feel a sense of desperation. Desperate people sometimes do desperate things. Ensure that your controls prevent an employee from thinking that he or she can borrow funds undetected.

  • Ensure that sole trust and responsibility for finances is not placed on a single person
  • Have bank statements sent to someone other than the person reconciling the account
  • Promptly reconcile bank statements, which includes reviewing the front and back of check images and NOT relying on the listed payee entered into the accounting system
  • Know your vendors and know when new ones are added
  • Verify that payments received agree with bank deposits
  • Personally sign all checks after examining backup documentation, including invoices, delivery slips, etc.
  • Perform a background check for all potential employees who will be involved in handling accounting transactions. This should include a search for prior criminal history, a credit report and a reference check from past employers. Just because the majority of people committing fraud have no prior criminal record, you do not want a serial fraudster in your organization. Just knowing that an organization does background searches is a great deterrent.
  • Develop a fraud policy and adhere to it at all levels. Employees do look to their executive director as well as senior managers to determine what type of activity is acceptable, so don't underestimate the tone at the top of an organization.
  • Insist that employees take their vacations. It not only ensures a mental break for your dedicated employees, it also ensures that someone else must perform at least some of their duties while they are out.
  • Have theft insurance in place. It is very cheap and in some instances will help cover the cost of an investigation.

The Maine Association of Nonprofits has over 750 nonprofit members and 125 annual corporate supporters and offers programs, tools and resources to help nonprofit leaders implement sound management and financial practices. Preserving an organization's reputation and integrity is critical to sustaining and growing its community mission.


Get more information on deterring employee theft on the MANP website:

Guiding Principles and Practices for Nonprofit Excellence in Maine Program https://www.nonprofitmaine.org/principles_practices.asp

MANP Online Management Resource Library https://www.nonprofitmaine.org/resource_library.asp

Management Training and Leadership Development Programs https://www.nonprofitmaine.org/education.asp

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