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
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