Early Prevention and Detection will Reduce Your Risk Of Fraud

Given the noble goals and missions of nonprofit organizations, it would be nice to think that their employees embody those same above-board values.  However, nonprofits are at risk of fraud every bit as much as for-profit organizations, and often the risk is even greater due to smaller staffs, lower pay and the specialized nature of nonprofit operations.  Following is a brief guide to preventing and detecting fraud in a nonprofit organization.

Segregate duties.  Prevention is preferable to detection, and just as in the commercial world, a nonprofit should make every effort to avoid having a single staffer in control of all phases of a transaction.  At least two people should share the responsibilities of entering new vendors, producing invoices, generating checks and reconciling bank statements. While this might create a staffing challenge in a smaller enterprise, at the very least the organization should arrange for bank statements to be mailed directly to, and reconciled by, someone other than the person who cuts the checks.

Recognize Red Flags.  What should the person who receives those bank statements be looking for?  Here are a few things to look out for:

Tacking on: The employee adds letters or another word to the organization’s name in the payee field of incoming checks, opens an account in that name and diverts the donations.  The best defense, again, is separation of duties wherein one employee logs incoming donations and another prepares the deposit.

Substituting cash for checks.  An employee with access to cash donations waits for the arrival of an unexpected (not associated with accounts receivable) check, places the check into the day’s deposit and pockets the same amount in cash.  The overall deposit is unchanged, but the amounts in cash and in checks are different.  To prevent this, the person reconciling the account needs to validate the form (cash, check, credit card) of each payment.

Check washing: No, not money laundering… actual washing of the ink from incoming checks.  A staffer uses household cleaners to carefully remove the ink from the payee line of a check and substitutes their own name or that of an accomplice.

Deposit lapping: In this scheme an employee skims cash from one day’s receipts and then delays that day’s deposit for several days, making up the stolen amount over that time.  The organization needs to ensure that each day’s deposit is made no later than the following morning… the longer the delay, the greater the opportunity for fraud.

Nonprofits often have to make do with smaller staffs than their for-profit counterparts, and in many cases salaries may be lower as well. That combination often will tempt employees into rationalizing that they are justified in taking additional money for themselves. Segregation of financial documentation duties and awareness of fraud indicators are a nonprofit’s best defense against fraud.

If you have any questions, please contact Bill Sims, CPA, partner, Salmon Sims Thomas & Associates .