Fraud within an exempt organization will never be 100% preventable. However, understanding the characteristics and typical signs associated with fraudulent behavior can help mitigate some of the risks posed to an exempt organization, specifically a smaller exempt organization where complete segregation of duties may not be feasible.
Common Fraud
The most common type of fraud in an exempt organization is the misappropriation of assets. Not surprisingly, cash is the most common asset to be misused or stolen. Perpetrators will generally start with small, seemingly unnoticeable amounts, and should those acts go undetected, increased levels of courage may result in attempts at larger sums. These attempts may be as blatant as larceny (physically removing assets from the exempt organization’s property) or as subtle as skimming (pocketing cash from a transaction before it is ever recorded on the exempt organization’s books). However, in our experience, the most common misappropriation of an exempt organization’s assets deals with fraudulent disbursements.
So, how can management and the governing body of an exempt organization lessen the likelihood of fraud occurring? By knowing the signs, keeping assets secure, and regularly reviewing the financial statements.
Causes and Signs of Fraud
For a fraudulent act to be committed, three attributes must typically be present:
- Incentive or pressure
- A perceived opportunity
- Rationalization of the act
Many employees on the verge of committing fraud may feel disconnected from the exempt organization or think they are “owed” something for their efforts. Creating a culture within the exempt organization that encourages accountability and openness with employees will allow management to better know who is working for them and may create opportunities to grant employee praise or reward. In doing so, this creates the feeling of a “team” environment where all employees feel that they are contributing to the common goal.
Additionally, this openness will allow management to see when employee behavior changes occur. For example, perhaps an employee is suddenly reluctant to take time off, may want to work additional hours when no one else is around, or is seen taking exotic vacations that previously wouldn’t have been conceivable. Whatever the signs may be, being able to recognize and address them early will give the organization the best chance at minimizing fraudulent activity.
Keeping assets secure may seem straightforward enough, but it’s not uncommon for exempt organizations to skip this simple step. The first physical asset that should be secured is petty cash. Additional items to consider are credit or debit cards, blank check stock, and Signature Stamps. Limiting access to only those with legitimate need lessens the chances of these assets being misused.
Preventing Fraud from the Start
Finally, and probably the most effective means by which an exempt organization can catch fraud in its early stages is having more than one set of eyes on the finances (i.e., the Segregation of Duties). This means regular management and board review of financial statements and even the supporting books and records.
As an Executive Director, COO, or Board member, it’s okay if you don’t fully understand the debits and credits behind the financial statements. Ask questions. Inquire as to why a specific item is showing up on the financials, why something was recorded a certain way, and what is the nature of a particular transaction. This process of inquiry will not only allow you to understand your exempt organization’s financial statements better, but it will also let your team know you are watching.
For more accounting tips, check out Exempt Org Budgeting 101 or Nonprofit Accounting Quick Tip 3-part Series.
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