According to the “2020 Report to the Nations” by the Association of Certified Fraud Examiners (ACFE), internal fraud drains approximately $4.5 trillion annually from global businesses, and not-for-profit organizations are not exempt. The median loss suffered by a not-for-profit group victimized by fraud was $75,000. This overview of the ACFE report includes common forms of internal fraud and effective prevention measures.

Forms of Internal Fraud

Although organizations can experience pilferage from volunteers, vendors, and other sources, employees account for the highest losses when factoring in offenses such as fraudulent insurance claims, unauthorized time off, and theft of proprietary information. Crimes can be as simple as stealing supplies or as complex as sophisticated financial statement fraud.

More specifically, fraud by managers and key executives generates the highest dollar losses because these employees are in a good position to falsify financial, credential, work-related, or test-related documents for personal gain.

Preventative Measures

Improve internal controlsDo not allow the same employee to keep books, collect funds, write checks, and reconcile bank accounts. Also, arrange for monthly bank statements to be delivered unopened to the head of your organization, who should review them for unusual transactions, such as declining deposits and checks to unfamiliar parties.

Conduct background checks on new employees.

Arrange for fraud audits by the organization’s outside accountantsCPAs can conduct regular independent reviews of cash accounts, bank statements, and other items to detect criminal activity. Surprise audits are often an effective, yet underutilized tool in the fight against fraud.

Be willing to prosecute perpetrators.

Provide ethics training for employeesEducate staff members about the possible sources of fraud and consequences, such as the loss of jobs, raises, and profits.

Institute anonymous fraud reporting mechanisms, such as hotlinesFraud is commonly discovered through tips from employees, vendors, members, or other sources. These people are frequently in a position to see violations of an organization’s standards or excessive personal spending by a colleague.

Install workplace surveillance devicesA video camera monitoring a place in your building where theft is suspected can deter or catch perpetrators.

Look for behavioral red flagsAn employee living beyond his or her means and having financial difficulties can be a signal of a larger problem. You may also observe an unwillingness to share duties, a “wheeler-dealer” attitude, divorce or family issues, addiction problems, refusal to take vacations, and an unusually close association with vendors or customers.

Examine the workplace environmentAttitudes are one important factor in whether or not employees steal. Employees who feel they are treated fairly by their employers are less likely to commit fraud. Many offenses are committed by people who hold grudges and are looking for revenge.

No Room for Fraud

Take a zero tolerance stand on fraud. With a few basic procedures in place, internal theft can be significantly reduced — or even eliminated — so your not-for-profit organization can flourish. To learn more about what you can do for your organization specifically, contact one of our fraud specialists.

Source: Assn. of Certified Fraud Examiners, 2020 Report, https://acfepublic.s3-us-west-2.amazonaws.com/2020-Report-to-the-Nations.pdf

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