What are the Different Nonprofit Frauds to Watch Out For?

Fraudulent activities can harm your nonprofit organization. It is essential to put safeguards in place in order to prevent nonprofit fraud.

Nonprofit organizations are exposed to a lot of risks. There are nonprofit frauds that can affect the institution, its stakeholders and charitable cause. To avoid embarrassment and disappointment, these entities must be able to discover, prevent and guard against these acts of dishonesty. The most common fraudulent schemes are the following:

  • Off Book or Skimming Scam
  • Financial Statement Fraud
  • Purchasing Ploys or Schemes

Skimming Scam

Skimming means pilferage of cash from the nonprofit before funds are recorded in the organization’s accounting or bookkeeping system. It is one of the most negligible nonprofit fraud and the hardest to detect. There is no direct trail of audit which can be traced to the source. It is frequently detected accidentally or through the professional assistance of certified fraud examiners. However, it is difficult to spot if transactions are not recorded by bookkeepers.

Financial Statement Fraud

Another nonprofit fraud to watch out for is financial statement anomalies. It is quite rampant in the business sector but also turning out to be a problem for nonprofits. This takes place when unscrupulous individuals try to conceal or rig financial statements of their organizations. The purpose is to deceive potential contributors and government agencies.

Purchasing Schemes

Purchasing fraud usually involves two or more employees although one person can perform this kind of theft. It has something to do with disbursement of nonprofit funds particularly acquisition of supplies and equipment. Among the most common acts are over-billing, fabricated receipts, issuance of checks, and conflict of interest.

Prevention of Fraud

To fight and prevent nonprofit frauds, organizations must deal with the problem from the board and management down to employees, suppliers and volunteers. The key is to establish an anti-fraud atmosphere and fraud-risk management strategy. The problem is nonprofits have limited resources and time to implement the proper controls. Given such circumstances, leaders need to exercise a policy of non-tolerance for prompt deterrence of illicit practices.

Nonprofit boards must focus on four primary areas such as responsibilities, structures, education, and risk assessment. An organizational structure must be put in place. There should be strict supervision at the board level along with monitoring and audit committees. Nonprofits must implement information awareness and education seminars, workshops and training sessions for staff and volunteers. Topics should include reporting systems, proper monitoring and detection.

An equally important factor is risk assessment. It is necessary for the watchdogs to identify inherent risks of nonprofit frauds once the duties and responsibilities are singled out. Of course, the organization will require the assistance of benefactors or sponsors to implement fraud risk techniques effectively. It is important to determine whether risk management will be incorporated into administrative functions or treated as separate element. Regardless of approach, the objective is the same. Infuse a risk management component into day to day activities of employees and the nonprofit itself.

Nonprofit institutions will only gain the credibility it needs if their respective leaders are able to combat cases of nonprofit frauds.

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