Fraud risks and prevention in your non-profit

Fraud in a non-profit is particularly damaging for the organization. Non-profits must maintain the trust of their grantors and donors by being good stewards of the funds with which they have been entrusted. When fraud occurs at a non-profit, donations plunge and grantors start to look elsewhere to find the services they require. Without the revenues, your non-profit cannot serve its mission. Maintaining the integrity of the organization and trust of both funders and clients is crucial to survival.

With a combination of procedures and monitoring tools, your organization can implement relatively strong controls. Even if you have a small office, there are simple steps that can be followed.

Monitoring – Two of the most effective tools for detecting fraud are reconciliations and regular financial reporting with comparisons.

1. Reconciliations are crucial for verifying that all the transactions are recorded in the accounting software. They may not be recorded correctly, but at least they are in the software and can be moved to the proper classifications.   At a minimum all the bank accounts should be reconciled each month. Other components that may need to be reconciled include: investments, accounts receivable, prepaids, fixed assets, accounts payable, accrued expenses, and debt. For bank account reconciliation it is ideal that someone who is not involved with cash receipts or disbursements reconcile the account. For many non-profits, this is a board member with an accounting background.
2. Monthly financial reporting is ideal for most non-profits. Those reports of the financials results should be compared with budgeted results or prior year’s results. Significant changes or variances can be identified and investigated.

These monitoring tools are simple and easy to execute. However, to be effective, they must be executed on a regular basis. Generally no longer than once a month to get the most effectiveness from them.

Procedures – There are many ways that an organization collects money and then disburses it. For each method of collecting and receiving there is generally a simple, cost effective procedure that can be used to minimize the risk of misappropriation

Collection Procedures

1. Donations or payments received through the mail should be logged by a person outside of accounting. Generally, an intern or a receptionist handles this. There is then a second source to use if a question comes up regarding whether a particular check was received.
2. Donations or payments received online should be recorded into the accounting software and reconciled with the online portal (PayPal, etapestry etc…)  This also helps to ensure that the online account is exclusively linked to a bank account controlled by the organization.
3. Cash collected at special events can be problematic since those events are far between and the staff is generally augmented by volunteers. You should have at least two people charged with counting the cash. It is better for a volunteer to be paired with a staff person. Have both people record via signature, email etc. that they both agree on the final total of cash. Attach that verification to the bank deposit to protect all parties involved.
4. Credit memos for invoices should be approved by someone other than the person creating the credit memo in the accounting software. This minimizes the risk that a customer may pay but have their account credited and the money pocketed outside the organization.

Disbursement procedures

1. Payments to vendors and suppliers should always be approved by someone other than the check signer. That approval should be evidenced somewhere. If the executive director needs an expense approved, they should approach the Board chair.
2. Requiring receipts for purchases with the organization’s credit card maintains accountability of those who have the priviledge (or burden) of carrying a company credit card. If receipts are not provided, there needs to be a good explanation. If this persists, other action needs to be taken up to confiscating the card or requiring the employee to reimburse the organization for the expenditure.
3. Never sign a blank check for a delivery later! (you would be surprised how much this happens)
4. For online payments made from the organization’s account, make sure that evidence of the approval of that payment is kept somewhere. Also, you can limit the amount that a person can authorize in a particular time frame. Online payments and transfers and emerging as a difficult matter to implement good internal controls.

The above are good ideas. I would love to hear yours. Each individual organization’s situation is different. If you would like to discuss your situation in depth further, please email me @ gfulton@fulton-kozak.com or call me at 770-692-8250.