Not-for-profit organizations are important members of many communities, providing essential services and programs to those in need. Sadly, like all organizations, they are susceptible to fraud, which can have a devastating impact on their ability to accomplish their missions.
According to the Associate of Certified Fraud Examiners in their recent 2024 study, the median fraud loss for not-for-profit organizations is $76,000. While this number in fraud loss is half the size of those within other for-profit industries, even these numbers can be crippling for many not-for-profits, most of whom may have much smaller onsite staff. In short, many not-for-profits simply don’t have extra funds to lose.
Most Common Types of Not-for-Profit Fraud
There are many different types of fraud that can occur in not-for-profit organizations, and we’ve listed some of the most common types below. It should be noted that while these are considered to be more basic examples of fraud, past experience has taught us that many frauds that occur have been ongoing for months, or even years in some cases.
- Misappropriation of assets: Considered to be the most common type of fraud, the misappropriation of assets involves stealing money or other assets from the organization. This can be done in a variety of ways, such as embezzling cash, using credit cards for personal expenses or creating fake invoices.
- Expense account fraud: Bad actors commit this type of fraud by submitting false or inflated expense reports.
- Grant fraud: Grant fraud involves using grant money for purposes other than those for which it was awarded.
- Payroll fraud: This type of fraud involves creating fake employees or paying employees for time they did not work.
How Not-for-Profits Can Protect Themselves from Fraud
What can non-profit organizations do to protect themselves from fraud? We’ve provided a few best practices for board members and senior leadership:
- Establish a strong tone at the top: The board should establish a clear zero-tolerance for fraud. This includes having a written fraud policy and procedures in place and communicating them to all employees and volunteers.
- Implement stronger internal controls: Often, due to fewer people in smaller not-for-profit accounting departments, these organizations tend to have fewer internal controls in place, making them more susceptible to fraud. Internal controls are the policies and procedures that help prevent, detect, and deter fraud. Some examples of internal controls include segregation of duties, required approval for expenditures, and conducting regular internal control audits. Strengthening these areas can help avoid overrides of existing controls and gaps in management reviews.
- Invest in fraud prevention training: Proper training and education in anti-fraud tactics for your employees and volunteers can go a long way to help those active within your organization become more aware of the different types of fraud and how to spot them.
- Conduct regular risk assessments: Regularly assess your organization’s risk of fraud and take steps to mitigate those risks.
- Consider hiring an outsourced accounting provider: Many not-for-profits utilize accounting staff that work either part-time, as volunteers or while wearing other hats in the organization. An outsourced accounting provider can help you streamline and centralize crucial accounting and financial functions with better efficiency and accuracy, meaning better protection against potential fraud within your accounting and finance department. This independent accounting function in an accounting process can be invaluable in preventing fraud.
Other Tips for Board Members
In addition to the aforementioned best practices, board members should also be aware of their responsibilities in preventing fraud. Board members have a fiduciary duty to the organization, which means that they oversee the organization’s finances and ensure they are managed responsibly.
Board members should also be educated and aware of potential red flags of fraud within the organization, such as unexplained changes in financial statements or employees living beyond their means. By understanding the fraud risks and taking steps to mitigate them, board members can do their part to help safeguard their organizations and ensure that they continue to serve their communities effectively.
Windham Brannon Knows Not-for-Profit Fraud
Windham Brannon’s Forensic and Litigation Practice is experienced in helping not-for-profit organizations better protect themselves from fraud, with professionals who are credentialed and certified in fraud examinations and financial forensics.
For questions or more information about how our team can help you strengthen your organization against potentially fraudulent activity, contact your Windham Brannon advisor, Kevin Bennett or Charlie McGimsey today.
