Preventing Fraud in Your Nonprofit– Tips

I don’t know about you, but I’m sick and tired of hearing about nonprofit fraud, especially when done by an in-house, trustworthy person. It’s heartbreaking to see people in stealing from such organizations. In many cases, the theft lasts for a while, until someone stumbles upon it by chance to the shock and dismay of many people. Unfortunately, this is not that rare. So, how can a nonprofit stop such unpleasant incidents and at the same not be overtly suspicious of people who are, in most cases, innocent?

There are a couple of activities that can be used to find errors that may be very innocent, while at the same time identify signs of fraud. These tasks, known as controls within financial circles, can do double-duty in keeping an organization safe and error-free. They are by no means the only controls to prevent or identify fraud, but they are fairly easy to perform and worth a close look.

1- Look at bank accounts online —-Someone from the board could review bank activities online, looking for unusual vendors or checks. This task should be specified in the organization’s policies and procedures and should be known by everyone. The idea here is to let people know that there’s a process established that is part of the day-to-day business of the organization and not a big deal. Having a board member ask questions about checks and deposits should be expected. This is not micro-management, but a way to double check on bank transactions, like unusual vendors or amounts paid out or deposited.

A second pair of eyes looking at online bank data at least once a week can also help to find errors. For example, if the board member knows that someone donated $20,000 recently, but only sees $2,000 deposited in the bank, then the bank should be contacted and asked if this was an error on the part of the bank, which can happen. This discrepancy could also be an error from accounting that can be fixed right away. However, if errors don’t explain the discrepancies, then the situation needs to be further investigated. There’s a chance that someone misappropriated the funds, even if you don’t want to think about it.

2- Contact donors often — Someone outside development dept. or the CEO’s office could contact donors, especially if they haven’t donated as before or as expected. The point is to have someone who usually doesn’t talk to donors to follow up on an informal basis, verifying if any donation or payment was made. Why is this important?

Fraudsters call donors as a follow-up, but when the money arrives instead of depositing the money in the organization’s bank account, they deposit it elsewhere. Sometimes the payment goes to a bank account with similar name or initials, while other times the check is endorsed and deposited elsewhere with a totally different name.  Banks usually don’t look this closely at the check to identify the ruse, unless there is a problem. Accounting staff wouldn’t  know about the donation, and nobody, except for the thief, knows about the payment. This issue may be found when someone different talks to the donors.

Note that issues found are likely to be very innocent as well. Maybe the donor forgot about making the donation. However, if the donor made a payment, but it didn’t make it to the organization’s bank account, it could be because it was lost or the bank deposited it in the wrong account by mistake. These situations usually don’t point to internal fraud, just errors that can be corrected.  The point is to follow the money trail.

These are only a few activities a nonprofit can do to protect itself against theft and fraud.  It’s sad that we have to be a bit paranoid running a nonprofit, but it’s a must in today’s environment. Auditors may come in once a year to double check on financial issues, but they usually don’t find all fraud. By following just these two processes, nonprofits can make fraud harder to happen and that’s always a good thing.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.

 

Checks & Balances Ideas for Nonprofits

Checks and balances are activities that protect organizations against errors and fraud. Also known as internal controls, these checks and balances provide an extra level of protection to the organization so that errors or losses are issues are caught and can be fixed or managed. Internal controls may also protect against fraud, including money theft. The good news is that you don’t  need to spend a fortune to have good controls at a small environment, nonprofit organizations.

Below are some ideas that can be implemented easily to protect your organization:

1- Have bank statements sent to the home of the executive director or a board member not involved in accounting. This person can take a quick look at the statement and at copies of checks for any unusual activity. Then he can give the statements to accounting personnel. Since many use online banking, someone apart from accounting can take a look online at bank transactions, even before statements are mailed out.

2- Always have two people counting cash. One person can count first while another one witnesses it, and then the other person counts it, writing down the total and then securing cash with a rubber band and/or an envelope. Keep it in a safe before depositing it in the bank, not in a drawer or in an obvious place. If needed, get a safe and have it bolted to the floor or wall.

3- Wire transfers must be done by two people- one to initiate the transfer and another one to approve it. Both could have passwords or PIN numbers for extra security. In the case of online payments where the bank pays someone directly, at least one person outside accounting should approve this before it is done. You can set this up with your bank.

4- Petty cash is kept in a safe, not in a desk drawer. Thieves know that drawers may contain petty cash and they go there first. Keep petty cash small and replenish often, checking on receipts.

5- Review bank reconciliations monthly with no delays and look at odd deposits that have not cleared the bank and old checks that are still outstanding. Check on deposit amounts on the books and on the bank to make sure they are the same. Also, look at checks being cashed to see if the amount and payee make sense. Many online banks allow you to actually see a copy of the check online, which can be very helpful.

6- Give receipts to everyone giving your organization money, especially cash. The receipt book should have duplicates so that the top receipt goes to the donor and the copy stays in the book. Depending on the amount, the person receiving the money could sign a receipt to make sure the organization has proper records.

7- If using faxed forms for donations or payments, mark the original faxed page as “Original” in red. This is especially important in credit card donations. Otherwise, it is too easy to charge a card multiple times for one donation. Make sure that donors know that faxed forms are NOT to be mailed. A good option here is to handle most cash inflows through a website.

8-People working with cash and accounting should take vacations. Many fraud cases are discovered when the perpetrator is home sick or away and someone else takes over for a few days. It’s good to have more than one person trained in certain accounting tasks so that if something happens, he or she can fit in with minimum training.

9- Make sure your insurance policy covers losses, such as fraud, just in case. This policy should also cover volunteers and part-timers. Be sure to double check with your insurance company regarding any special events or programs that may require a special rider.

10- Consider getting background checks on everybody handling financial tasks. It’s not that expensive and you can decide about hiring the person upon reviewing the background check. These checks are often required by insurance companies, so it’s usually not a big deal.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award