How to Protect Your Organization From Fraud

Wallet with coins, cards, and cash viewed through the lens of a magnifying glass.

All nonprofits, no matter the industry or size, can be victims of fraud. However, small nonprofits tend to have disproportionately large losses from asset misappropriation, and are far less likely to recover from fraud. They often employ friends and family that they trust, and rely on that trust rather than internal controls to protect them from fraud.

Trust, without internal controls and segregation of duties, creates an opportunity for fraud. Often, the very traits that prompt management to rely upon a trusted employee without reviewing his or her work make fraud possible.

Some common employee traits found in fraudulent situations include:

  • Employees who go to extremes in their consideration of their fellow co-workers. They like to be involved in everyone’s personal business, and they like to be everybody’s friend. Their involvement and consideration foster a great sense of trust in order to create the opportunity for fraud.

  • Employees who work excessively and refuse assistance. These employees work longer hours, and refuse to take time off. As a result, they tend to singularly handle several duties, causing their employers to place all of their reliance on these employees. This undermines a system of segregation of duties which helps protect employers from fraud.

  • Employees who present incomplete accounting records. Because the records are allowed to be poor, signs that fraud is occurring are easily overlooked.

  • Managers or supervisors with dominant or controlling personalities who refuse to delegate work or take time off. These individuals do not delegate responsibility in order to hide and continue their fraudulent activities.

Many of the traits above are found in conscientious and reputable employees. All too often, however, these traits assist the employee in committing and concealing fraud by eliminating or circumventing internal controls. Several simple steps that every nonprofit organization should implement to prevent and detect fraud are as follows:

  1. Perform background checks on employees.

  2. Create an environment where honesty and integrity are highly regarded. Communicate with employees that fraud or theft is not to be tolerated.

  3. Organizations should always receive bank statements directly from the bank. The statements should be reviewed by the organization before giving them to the person responsible for the bank reconciliation. Also, if possible, cancelled checks should be sent with the bank statements.

  4. Maintain current and accurate accounting records. Accurate and complete accounting records make concealing fraudulent activity more difficult.

  5. Have the organization’s CPA perform periodic reviews of internal controls and perform interim reviews of the financial statements. This tells employees that others are watching and may deter theft.

  6. Require all employees to take time off, and cross-train employees so that they can review each other’s work. If an employee is concealing a fraud, it is likely to be uncovered in his or her absence.

  7. Carry adequate employee-theft insurance.

  8. Physically secure the organization premises and equipment. Restrict after-hours access and allow access to high-risk areas only to individuals who require it as part of their job. A video surveillance system, or a lock with limited access, can be very effective in preventing fraud. If alarms and video surveillance are used, have these systems checked on a regular basis to ensure they are functioning properly.

  9. Perform periodic inventory observations and investigate unusual shortages.

  10. Review computer security for proper administrative and access rights. Access should be appropriate considering the employee’s job responsibilities.

  11. Create a written fraud policy. This policy should be reviewed and acknowledged by all employees.

Employee theft, fraud, and embezzlement are always going to be a concern for any nonprofit organization. Following these simple tips, however, is a big step toward preventing and detecting fraud and saving the organization from suffering financial loss.