Fraud is an ever-present risk for nonprofit organizations of all sizes, missions, and budgets. But for small nonprofits, the risk is even greater. Small organizations often have disproportionately large losses from fraudulent activities – and are less likely to recover. Fortunately, many of the best and most effective fraud prevention measures are free and easy to implement.
Segregate fiscal duties – Divide up your organization’s financial responsibilities between two or more staff members. The person who deposits checks at the bank should never be the one responsible for reconciling those bank accounts.
Designate your authorized approvers – Keep a list of everyone who is authorized to approve payments, and set up a standard procedure for approval. Online bill payment systems such as Bill.com can be useful for keeping a time-stamped record of approvals.
Perform background checks on new employees – As the saying goes, “Trust, but verify.” Background checks should be performed on all new staff members before hiring.
Maintain clear accounting records – It’s easier to manipulate accounting records when they are messy, outdated, or unclear. Make sure your bookkeeping entries are performed as soon as possible after transactions occur, and reconcile your bank and credit card accounts on a monthly basis.
Use strong passwords – With more and more financial data in the cloud, it’s crucial to use secure passwords for all your various logins. Take advantage of read-only access and two-factor authentication whenever possible.
Keep blank checks under lock and key – Prevent check tampering by keeping your blank checks locked away. Or even better, you can do away with paper checks entirely by using an online bill payment system and ACH transfers.
Write an internal controls policy – It’s hard for your staff to follow the rules if they’re not clearly spelled out. Every organization should have an internal controls policy that explains how financial procedures are performed. Writing this policy down can also help bring attention to any weak spots that might make your organization susceptible to fraud.
Require supporting documentation – All payments and reimbursements should have supporting documentation such as an invoice or receipt. Never make a payment without proof of the product or service that is being purchased.
Rotate responsibilities – It’s a red flag for fraud when employees work excessively, never take a vacation, or refuse assistance. It’s important to occasionally get another set of eyes on your financial records, whether that’s through temporary reassignments or outsourcing certain tasks to an independent accounting firm.
Conduct an audit – Whether or not your organization is required to undergo annual audits as a condition of your funding, it’s a good idea to conduct regular audits of your financial statements. Auditors can help detect fraud and make suggestions for improvements. If cost is a concern, financial statement reviews can be a less expensive way to provide some assurance.