Facts about
Nonprofit Fraud

It is important to understand the types of fraud your nonprofit organization is most likely to experience in order to create effective anti-fraud policies. The Report to the Nations on Occupational Fraud and Abuse, the definitive study by the Association of Certified Fraud Examiners (ACFE), provides the following data:

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The mission of nonprofit organizations is generally philanthropic, and employees, especially senior management, share this mission. Nonprofits are therefore more trusting of their employees and have less strict financial controls than for-profit organizations. As a result, nonprofit embezzlement cases and other forms of employee fraud are on the rise.

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Several noteworthy trends in occupational fraud are highlighted in the ACFE study, as well as how companies can combat the problem internally.

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Important trends emerged from the 2,400 or so fraud cases studied. According to the ACFE, all fraud schemes can be categorized according to these patterns and classified into three categories: misappropriation of assets, corruption, and financial statement fraud.

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DID YOU KNOW theft of funds is not generally covered by insurance?  The employee dishonesty provisions of a standard insurance policy does not protect a charity  from loss when an employee conducts an unauthorized fund-raising campaign and uses the proceeds for himself, according to the First Circuit Court of Appeals. The Court affirmed a District Court decision denying coverage for the Special Olympics International and its Massachusetts affiliate.  In that case, an area manager hired a telemarketer to launch a fund raising campaign using the Special Olympics name and logo without the organization's knowledge. He deposited the raised funds in an unauthorized bank account opened in the organizations name from which he wrote checks to himself totaling over one million dollars. When this was ultimately discovered, as it usually is, Special Olympics sought to recover those funds under their employee fidelity policy. Not only did they not recover a single dollar, they lost even more by way of legal fees, payroll dollars, and undetermined donations withheld from benefactors whose confidence was now lost.

Insurance policies are intentionally ambiguous, so it is up to the insured to read and understand the fine print. A simple re-wording of a clause can change the entire meaning, so if it's not transparently clear, have them reword it.  Remember:   Insurance Companies are not in business to pay out claims.  An Executive over a federally funded and/or charitable trust has the fiduciary responsibility to read every page, every provision and every clause, no matter how time consuming and boring it may be, and not  sign anything that is not fully understood. Asking for additional clarification does not make one look foolish or ignorant, quite the opposite.

How to Prevent

Nonprofit Fraud

To help combat fraud, we recommend following these basic steps:

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1. Keep it locked up! This includes cash and checks. When counting money, make sure more than one person is present.

2. Implement a strict "separation of duties" policy. Different staff should handle cash functions such as deposits, check writing, and bank reconciliations.

3. It is imperative to keep bank reconciliations up-to-date. It may be necessary to hire temporary help to bring your bank reconciliations up to date if you're behind.

4. Checks should not be pre-signed. Safeguards need to be in place if autopen signatures are used.

5. You shouldn't be too trusting! Sometimes it is the people you expect the least that do the most damage.

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Last but not least, monitor the cash balances in your fund accounting software, send alerts to more than one supervisor, and keep track of your audit trails. Put policies in place and ensure they are enforced. Nonprofit fraud is easier to prevent than to detect, but if you need to file a report, contact your local law enforcement agency. If that does not yield the results you expect, contact The Office of Foundation Oversight for more useful information.