Does Your Nonprofit Have an Internal Controls Gap?
October 14, 2021

The typical defrauded nonprofit loses $75,000 per fraud incident, according to the Association of Certified Fraud Examiners. And that doesn’t account for the negative publicity and subsequent lost donations and support that often follow fraud. Although no preventive measure is 100% effective, strong internal controls can greatly reduce the risk that a crooked staffer or outside criminal will find gaps in your fortress.

Special Vulnerabilities

Internal controls are policies and procedures that govern everything from accepting cash to signing checks to training staff to keeping your IT network secure. Most nonprofits have at least a rudimentary set of internal controls, but dishonest employees and other criminals can usually find gaps in environments where controls are only somewhat effective or inadequately followed.

Why might nonprofits skimp on controls or enforcement? Typically, they devote the largest chunk of their budgets to programming and may not allocate enough dollars to fraud prevention. This can be especially problematic in organizations where executives or board members indicate that fraud prevention is low on their priority list. Nonprofit boards may also inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike their for-profit counterparts, nonprofit board members may lack financial oversight experience.

Trust is another potential Achilles’ heel. Nonprofits often regard their staff and dedicated volunteers as family. They may allow managers to override internal controls and volunteers to accept cash donations without oversight — both risky activities.

Don’t Let Your Guard Down

Some of the most common types of employee theft in nonprofit organizations are check tampering, expense reimbursement fraud and billing schemes. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is a relatively easy and quite effective method of preventing such fraud. Strong management oversight and confidential fraud hotlines open to all stakeholders can also reduce employee theft.

Indeed, although you should trust staffers, you should also verify what they tell you. Conduct background checks on all prospective hires, as well as volunteers who’ll be handling money or financial records. Also, provide an orientation to new board members to ensure they have a clear understanding of their fiduciary role.

Finally, handle fraud incidents seriously. Many nonprofits choose to quietly fire thieves and sweep their actions under the rug. However, this tends to encourage fraud by telling potential thieves that the consequences of getting caught are relatively minor. If an incident is hushed up, rumors could do more reputational damage than publicly addressing the issue head-on. It’s better to file a police report, consult an attorney and inform major stakeholders about the incident.

Prioritizing Risks

If you’re not sure where vulnerabilities lie or how your budget can be stretched to allocate more resources to fraud prevention, contact us. We can help you prioritize the most serious risks and find affordable solutions for closing control gaps.

© 2021

You might also like

Build a Better Nonprofit Board with Term Limits

Build a Better Nonprofit Board with Term Limits

Are your nonprofit’s board members subject to term limits? If not, you might want to consider implementing what’s widely considered a best practice. Some board members lose enthusiasm for the job over time or might even become ineffective or disruptive. Negative...

read more
Why Nonprofits Should Be Transparent about Compensation

Why Nonprofits Should Be Transparent about Compensation

More and more U.S. workers are calling for “pay transparency,” and nonprofit employers need to listen — and act. Pay transparency is the idea that employers should openly share their compensation policies and practices with job candidates, current employees and the...

read more
Cut Taxes by Reimbursing Expenses with an Accountable Plan

Cut Taxes by Reimbursing Expenses with an Accountable Plan

If you’re looking for another way to attract and retain staffers that won’t bust your nonprofit’s budget, consider offering an accountable plan. It’s an easy and low-cost way to reimburse employees for out-of-pocket expenses free from income and employment taxes....

read more