Reducing Fraud Risk for Nonprofit Organizations

Nonprofit organizations can be more susceptible to fraud than other organizations as a significant portion of their revenue stream may come from donations and fundraising for which there is no accounts receivable on the books.

A recent article in the June 2014 issue of the Journal of Accountancy titled “How Not-for-Profits Can Reduce Fraud Risk” highlights the following areas in which management can ensure proper controls are in place to prevent and detect possible fraud:

  1. Protect Donations at Fundraisers
  • Payments received at a silent auction should be received in dual custody, with one person receiving the bidding documentation and the other person receiving the physical payments. A third person should prepare the deposit and another individual should reconcile the bid documentation, the payment received and the deposit to ensure all funds received were deposited.
  • If payment is to be made at a later date, the winning bidder should be informed of where the payment should be sent. Subsequent write-offs of receivable balances should be approved by someone other than the individual responsible for receivable activity.
  • Payments for attending the event which are received at the event should be placed in an envelope and all envelopes should be collected and opened in dual custody. Receipts should be sent to the donor and any complaints by donors should be received by an individual other than the one responsible for collecting and depositing the funds.
  1. Secure Donated Merchandise
  • An organization should have policies and procedures for handling the receipt and disposition of donated merchandise. The policies should address how and by whom the merchandise will be used and how it will be disposed of at the end of its life. Periodic inventories should be performed and records should be maintained of such merchandise.
  1. Strong Hiring Practices
  • Organizations should ensure they have good hiring practices. References should be checked and criminal background checks should be performed. In addition, when hiring a person in a fiscally responsible position, the individual’s credit should be checked. Oftentimes, nonprofit organizations have difficulty finding well-qualified personnel as they may offer lower pay than for-profit organizations. This creates the potential for “rationalization” that they deserve higher pay, which can lead to fraud. In addition, many nonprofits place a lot of trust in their personnel which creates the opportunity for fraud.
  1. Segregation of Duties
  • No single person should have complete control over a single transaction. The same person should not be able to set up new vendors, enter invoices, print and mail checks, and reconcile bank accounts. By involving a second person in the process, an organization reduces the opportunity for fraud as now collusion may be necessary to commit the fraudulent act.
  • Bank reconciliations should be performed by someone other than the individual involved in recording of the day-to-day transactions.

Nonprofit organizations need to understand the risks affecting their organization and ensure they have appropriate controls in place to secure their resources.

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