Occupational fraud is an unfortunate possibility for any organization. No matter how large or small your nonprofit is, it's important to maintain proper financial controls. Here are five ways to reduce your risk:
Segregate Accounting Functions
Use a system of checks and balances to ensure no one person has control over multiple significant parts of a financial transaction. Without proper separation of duties, the accounting system can fail to prevent and detect fraud. Some common areas that should be separated are:
Banking - Do not let bank signers have access to the accounting software
Deposits - Separate the handling of deposits from the record-keeping function
Purchases - Separate purchase authorizations from the payables function
Payroll - Have time sheets approved before payroll is prepared
Take A Vacation
Accounting department personnel should be required to take vacation time for at least a continuous week. This both serves as a cross-training exercise for other staff, and also removes accounting staff from their daily duties. If any systemic fraud is occurring, this may help expose evidence of a cover-up.
Reconcile And Review
Bank reconciliations work to identify differences between the accounting system and bank statement balances. This function should be performed by a knowledgeable person outside of the bookkeeping role. However, in the real world of many short-staffed nonprofits, the director of finance or an accounting manager is often performing these reconciliations along with many other bookkeeping duties. If this is the case, management must review the organization's finances closely, as reconciliations can be an area manipulated to bury fraudulent transactions. Areas that should be reviewed by management include reconciliations, payroll (both pre- and post-submission), accounts receivable write-offs, significant purchases, and donor restricted receipts.
Get A Receipt
It's best practice to obtain a receipt for every credit card transaction. Keep access to credit cards secure and restricted to those employees who are aware of the policies and can be trusted. Credit cards should be reconciled monthly.
Encourage Additional Oversight
A key control for most small nonprofit organizations is oversight by the board of directors and/or its finance committee. These members often have a good sense of what to expect in terms of financial metrics. Board members should be encouraged to pay close attention and ask questions if they see any variances.
Every nonprofit organization should formally document its financial policies and procedures to ensure a consistent process is followed. This policy should be reviewed and approved by the board and/or finance committee annually. With these measures in place, your nonprofit should be able to quickly detect any instances of fraud and prevent future fraudulent activities from occurring.