Conflicted at Heart: A Not-for-Profit Organization’s Battle to Defend Against Fraud

The not-for-profit industry is a unique industry; one that is motivated not by earnings, but the organization’s mission.  This defining characteristic benefits every not-for-profit organization and those they serve.  It enables organizations to qualify for tax-exempt status and invites donors to support the organizations with nonreciprocal revenue.  However, being mission-focused does not mean they are not immune to fraud. Three weaknesses that create an increased opportunity in not-for-profit organizations for fraud are less oversight of financial processes, fewer personnel assigned to financial processes, and less financial experience/background of personnel.  According to the ACFE’s 2012 Report to the Nations on Occupational Fraud and Abuse, the median fraud loss for not-for-profit organizations was $100,000.
Due to their nature, not-for-profit organizations attract different types of people than for-profit corporations.  In some cases, this leads to a board and management team that is not as well-versed in financial oversight. Although concentrating on people served is valuable in an organization dedicated to improving the communities in which they operate, it is just as important to ensure that the organization remains financially viable.  For example, ensuring vendors are properly approved protects the organization from writing checks to a shell company with the funds going to a disgruntled worker.  Good financial oversight simply requires the board and management to ask the right questions and consider potential weaknesses in the organizations’ control environment.

Financial departments in not-for-profits can, in some cases, be understaffed due to funding restraints. If this is the case, there may not be proper segregation of duties due to the size of the staff and/or composition of the organization.  Not-for-profit organizations may need to look outside of the finance department when designing their internal controls in light of staffing restraints.  They may want to consider involving personnel outside the finance department such as having a receptionist gathering donations before giving them to finance personnel or having the bank statement delivered to a member of the organization’s Board of Directors.  By properly designing the controls, it is possible to mitigate the risk of fraud without increasing payroll.

The lack of financial experience/background of personnel can also be mitigated, relatively inexpensively.   In order to properly train their personnel, not-for-profit organizations can work with outside firms/consultants.  Their auditors may also be able to help identify improvements that can be made to specific processes within the organization.  In this way, finance departments in not-for-profit organizations can begin to accumulate a sufficient amount of institutional financial knowledge and mitigate fraud.
Being mission-driven is an asset for not-for-profit organizations and does not need to create weaknesses.  Addressing the risk of fraud in a not-for-profit is possible. Creating a strong internal control environment does not need to be expensive.  In the long run, investing in proper financial oversight is prudent in light of the potential financial and reputational losses that may occur due to fraud.

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