Catch the Warning Signs of Fraud in NPOs

BY KYLE ANNE MIDKIFF

MONTHLY CHECKLIST SERIES
 

Catch the Warning Signs of Fraud in NPOs

With their high fund-raising and performance goals and with volunteers often handling money and keeping accounting records, nonprofit organizations can be prime targets for fraud. Here are some of the red flags CPAs can advise NPO employers and clients to watch for:
Budget cutbacks. Whenever any organization—especially an NPO operating on fund-raising dollars and volunteer leadership—cuts back by reducing its paid workforce, financial controls usually suffer. Remaining employees or unpaid volunteers must pick up the slack. This can lower morale and increase the likelihood of fraud among unhappy workers.

High turnover. When NPO volunteers and employees turn over faster than elected positions or job contracts dictate, it could be a sign people are distressed by committing or witnessing fraudulent activity or by being coerced into participating in it. Many guilt-ridden, frustrated bystanders or the fraudsters themselves decide to leave an organization altogether.

Refusal to take legitimate perks. When employees or volunteers are involved in an ongoing embezzlement scheme, they often don’t take vacation time or offered promotions so they can continue to hide their theft.

Overemphasis on short-term fund-raising goals. When board members, officers or executives become too concerned with increasing contributions, they often deemphasize internal controls and accurate financial reporting, leaving room for fraudsters to step in.

Poorly monitored remote event or promotional locations. Fraud often proliferates wherever supervision and control are at a minimum—such as during major fund-raising events such as benefits. This is particularly true when organizations—acting without proper accounting supervision—fail to create a paper trail with prenumbered tickets, receipts and the like. When cash is involved, it’s always a challenge to determine who took how much from the cash drawer after the fact.

Bounced checks. If the NPO’s board of directors knows the organization has enough funds to cover its expenditures and checks continue to bounce, chances are good the entity may be a victim of some kind of fraud.

Things don’t add up. If staff members or volunteers are working on the organization’s books and things don’t make sense, CPAs need to take a closer look. Employees or volunteers may be stealing payments and diverting them to their accounts as they come in.

Anonymous tips. Fraud warnings can come in the form of telephone messages or anonymous letters from employees or volunteers. While they sometimes may be frivolous and without merit, NPOs can’t afford to ignore them.

Lifestyle or behavior changes. An obvious discrepancy between an employee’s earnings and how he or she lives can be a red flag for fraud. If a person’s behavior suddenly changes, he or she may be under severe pressure because of fraudulent activity.

Inattention to details. An organization that doesn’t check account balances daily and reconcile bank statements immediately is inviting embezzlement. NPOs that don’t employ other controls, such as scanning paid bills for possible overpayments, spot-checking financial records without advance warning and reviewing mail before it is opened, also are inviting trouble.

Not conducting background checks on anyone handling money. This is especially true for volunteers, who NPOs frequently don’t scrutinize as closely as employees.

Keeping problems a secret. If an NPO doesn’t make a strong public statement about fraudulent activities when it discovers them, it leaves itself open to further violations by others who think the act went unpunished or unnoticed.

Failing to investigate and then prosecute to the fullest extent of the law. An organization that doesn’t conduct a full investigation to understand the fraudster’s methodology, the total amount of the loss, how it occurred and how to prevent it in the future can easily be defrauded again—in exactly the same way. Where appropriate the NPO should contact authorities and cooperate fully in a prosecution so employees and volunteers understand fraudsters will be punished.

Kyle Anne Midkiff, CPA, CFE, is a principal at Nihill & Riedley PC, a forensic accounting firm in Philadelphia, where she has served on multiple nonprofit boards. Her e-mail address is kmidkiff@nihillriedley.com .

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