The Risk of Fraud In Nonprofit Organizations

Nonprofit organizations are an important part of society but can be vulnerable to fraud. While only 9% of nonprofits are fraud victims, they often incur a devastating loss of up to $75,000 each year.

In this guide, we’ll discuss what fraud looks like in nonprofits, why it occurs in this sector, and steps they can take to protect themselves.

How Does Fraud Occur In Nonprofits?

Many kinds of fraud can occur within a nonprofit organization. First, it’s important to understand the nature of fraud itself. Here are some of the most common examples of fraud in the nonprofit world:

  • Misappropriation of funds: This occurs when an employee or board member uses company funds for personal use, usually by writing checks or stealing cash.
  • Kickbacks: A kickback occurs when a person in a position of power receives money or goods from someone who wants to do business with the nonprofit for personal gain.
  • Fraudulent billing: This involves billing for services or products the provider never delivered or charging for services that were not needed or used.
  • Internal theft: Employees may steal money by creating fake invoices, forging check signatures, and taking cash out of petty cash accounts before anyone notices.
  • Inflating numbers: Nonprofits must report their total number of clients served each year, alongside how much money they spend on each client. Some employees will intentionally raise these numbers to convince donors their money is put to good use.

Why Are Nonprofits At Risk for Fraud?

Nonprofits are at a higher risk for fraud and corruption than for-profit companies. There are several reasons, but one important factor is that nonprofits generally have fewer safeguards to protect against fraud than for-profit companies. 

For example, most nonprofits do not require employees to take anti-fraud training or complete an annual fraud awareness program. They also tend to have less strict policies regarding discretionary spending and gift acceptance than their for-profit counterparts.

Additionally, nonprofits are under pressure to spend money as efficiently as possible. This can lead some nonprofit workers to cut corners, leading to fraud within the organization.

Tips for Counteracting Fraud in a Nonprofit Organization

Fraud is a serious issue within all types of organizations, including nonprofits. While it may seem unfathomable to some, the reality is that there are people who’d love to take advantage of any opportunity they receive.

Here are some tips for keeping an organization safe.

Conduct Audits Regularly

When someone gets away with committing fraud once, they’ll likely try again. Performing regular financial audits allows nonprofit leaders to catch these incidents before they become a problem.

Have an Open-Door Policy

Nonprofits should ensure employees know they can come to their leaders with concerns about potential wrongdoing or unethical behavior. If organizations have an open-door policy, they’ll be able to catch any problems early on before they get out of hand.

Encourage Reporting

It’s best not to wait for someone to come clean on their own. Instead, make it clear that everyone has an obligation to report unethical behavior if they see it happening around them. This policy will ensure people feel supported when coming forward about issues like fraud or bribery.

Develop Training Programs for Employees

Educate employees about what constitutes fraudulent activity, so they know what to look for when making decisions related to their work. Training programs should also equip employees with tools like whistleblower policies and ethics hotlines. That way, they feel comfortable reporting wrongdoing without fear.

Conduct Background Checks on Potential New Hires

Make sure all employees pass background checks before hiring them. Nonprofits should also check in with new hires regularly to ensure nothing has changed about their demeanor. Changes in behavior could indicate something is wrong, such as suddenly taking longer breaks than usual.

Safeguarding Nonprofits From Risk

Fraud might occur in all industries, but it especially happens within the nonprofit sector. That’s why nonprofits need to take steps to avoid becoming victims of fraud. They can ensure they achieve this by implementing effective internal controls and policies such as those listed above.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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