How to Prevent Fraud in Your Nonprofit

February 21, 2020 | Article

Fraud is everywhere. Nonprofits can become targets because they house sensitive and personal information in relation to donations. They also exist based on strong brand reputation—meaning a fraud event could be devastating.

The Impact of Fraud on Nonprofits
There are several reasons why nonprofits are susceptible to fraud:

  • Nonprofits often have smaller teams, making the segregation of duties more difficult. A key fraud prevention tip is to cross-train people on roles, but without enough people, cross-training can be difficult. This becomes even harder when there are not enough people to create regular review procedures.
  • Nonprofits may have physical cash on hand. If cash comes through the door as a donation, it can be hard to secure even with strong internal controls.

Specifically, common schemes affecting charitable organizations include billing, corruption, expense reimbursements and cash on hand.

The Role of Nonprofit Board Members in Preventing Fraud
Most professionals are approached about serving as a board member for a nonprofit at some point in their career. It’s easy to immediately say “yes!”. But before committing, it’s important to find out the position’s expectations and responsibilities.

There’s a level of personal liability that comes with board membership. Ignorance to fraud risks without action can include removal from the board, damage to reputations and civil damages for negligence. Stakeholders typically expect board members to have a duty of care regarding oversight for the organization, understand the organization’s fraud risk and establish committees with responsibilities for managing fraud risk.

Fraud Prevention Tips for Your Nonprofit
Fraud is prevalent, and it’s hard to prevent it entirely. But there are a few steps you can take to help prevent it before it starts.

  1. Anonymous third-party reporting. One of the top ways to prevent fraud is to create the perception of detection. This begins with having an avenue for employees and board members to report concerns. Forty percent of frauds are uncovered by anonymous tips.
  2. Internal controls and review procedures. Try to involve more than one individual in all accounting functions and make sure an independent individual is reviewing financial information such as bank and credit card statements.

  3. Segregation of duties is vital for nonprofits when it comes to fraud prevention.

  4. Employee dishonesty coverage. Review insurance policies for employee dishonesty coverage and consider the cost benefit of increased protection premiums if something were to happen.
  5. Policies and procedures. Implement accounting processes and procedures as well as a fraud policy. Ensure your policies and processes are well documented and effective. In addition, make it a policy to include pre-employment background checks in your hiring process and ensure policies and job duty descriptions are continually updated.
  6. Tone at the top. If the top of the organization, including your board of directors, is not committed, fraud prevention will not work. The top of your organization must create and enforce an environment and culture emphasizing ethical behavior. The board has to be prepared to ask the hard questions and have difficult conversations when needed.

How to Protect Online Donations
The goal of every nonprofit is to make sure that funds intended for the nonprofit actually go to the nonprofit, but this is easier said than done when it comes to technology. To gain charitable donations from new donors, you must give them peace of mind. The donor must feel confident that their personal information is being protected from different types of fraud.

Credit card fraud and Social Security fraud are just a few of the frauds committed against donors looking to help public charities. The best way to represent ourselves and put your donors at ease is by being transparent and vigilant in how you represent yourself.

A few ways to do this include:

  • Provide links to credible third-party sites. CharityNavigator.com offers those who wish to donate a database and lists of charities that they find to be credible. It’s best to provide links on your website to organizations like Charity Navigator so that those wishing to donate see that you want them to do research before donating.
  • Provide proof of your nonprofit status. Make sure your website shows on nearly every page that you are a registered 501(c)(3) organization. In addition, you should always provide access to your EIN number to those who ask. Your EIN can then be checked against Charity Navigator to authenticate your site and your organization.
  • Ensure your website isn’t duplicated. To avoid charity fraud, you need to make sure that your website has not been duplicated. This common type of scam has been around for years, but it is often overlooked. It takes very little skill to copy all the code from a webpage. A person with bad intentions can use copied data to recreate any webpage on the internet by inserting it into a new webpage URL. From this point, it only takes a few slight variations to change the homepage address from, for example, fbi.gov to fbi1.gov or some other deviation of the original. The person could then set up a credit card payment process on the site and operate it with little threat of being detected.
  • Protect against stolen credit cards. Stolen cards constitute a data breach, which causes a headache and heartache for your organization as well as legal costs, data breach costs and a potential public relations nightmare. To ensure awareness, Google your entity on a regular basis and look for variations in the web URLs that come up. If you find one that does not match yours, report it and have it taken down.

The Impact of Fraud on Your Nonprofit
Nonprofit organizations operate for the public benefit. Because of this, they are given tax-exempt status. It is the duty, obligation and responsibility of every nonprofit to protect itself by protecting its donors. By understanding the risks and taking necessary preventative measures, you can reduce the fraud risk to your nonprofit.

What do you do if fraud does occur?

Understanding the Importance of Forensic Accounting

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