5 Best Practices to Detect and Prevent Nonprofit Fraud

An article published in the Nonprofit Times reported a guilty plea for embezzlement from a nonprofit official. At EMK Inc. this news reminds us that there’s never a bad time to talk about fraud prevention tips for your organization. 

Before we can implement fraud prevention policies, we need to look at how fraud happens.  

In August 2019, a Federal District Court Judge in Connecticut sentenced Stephen F. Harvey, the former president of the nonprofit Zezzo House Corp, to three years’ probation and home confinement. Harvey admitted to embezzling $33,000 from Zezzo House Corp, taking money from the $70,722 Zezzo received from the HUD Housing Opportunities for Persons with AIDS. Investigators believe that Harvey made cash withdrawals to spend on ineligible Zezzo expenses as well as diverting Section 8 checks to his personal account. 

In a second unrelated case, a Chicago veteran’s charity president also diverted funds for her personal use. Patricia Olshefski pleaded guilty to felony charges of using charitable funds for personal gain. Her husband has also been accused of stealing funds from the veteran’s charity. 

Both cases illustrate an urgent need for nonprofit fraud prevention. According to the Association of Certified Fraud Examiners, nonprofits lose $75,000 annually to fraud. While that may not seem like much compared to the for-profit median loss of $164,000 mentioned in the same paper, any loss can devastate a nonprofit.

5 Recommendations to Prevent and Detect Nonprofit Fraud

It is a myth that auditors detect most cases of fraud, according to the National Council of Nonprofits. Most nonprofits discover fraud due to a tip from an employee. Audits are but one of several recommendations to detect and prevent nonprofit fraud. 

Below are five best practices you can implement today to prevent and detect nonprofit fraud:

1. Implement comprehensive internal controls.
   1. Internal controls include steps for handling and managing a nonprofit’s finances. Create internal controls that include:
      1. Reconciling accounts in a timely manner, i.e., conducting end of month reconciliation of bank accounts and credit card statements to detect anomalies
      2. Requiring two people to witness petty cash withdrawals or handling any amount of cash
      3. Limiting who can access the bank records and accounts and monitoring their activities
      4. Having two designated people sign all checks
2. Train staff on internal controls and policies.
   1. Teach staff how to recognize signs of embezzlement and theft
   2. Implement a “zero tolerance” policy on fraud
   3. Determine if you will always press charges against fraud
3. Foster an open corporate culture
   1. Take all claims of fraud or strange behavior among your employees seriously
   2. Keep an “open door” policy among senior management for all staff to meet privately to discuss concerns
   3. Provide an anonymous “whistleblower” tip or method for employees to report problems immediately
4. Monitor documents and systems
   1. Review all bank statements promptly
   2. Lock checks in the safe until cashed
   3. Run reports promptly and monitor accounting systems to view who logs in and their activities
   4. Check documents randomly for evidence of backdated documents, altered signatures, and other signs of fraud
5. Watch for unusual employee behavior
   1. Observe any unusual spending patterns of employees who appear to be living beyond their means without a rational explanation
   2. Conduct background checks on all new hires to look for previous convictions of theft 
   3. Notice employees who refuse to take vacations; this may be a sign of someone covering up fraud

Fraud costs nonprofits more than revenue. Missing funds reduce the impact nonprofits make in their programs, decreases the public’s trust, and cause serious repercussions. 

Take steps now to prevent and detect fraud. 

Personalized Fraud Prevention Consultation from EMK

EMK would like to assist you with your nonprofit’s fraud prevention programs. We can help you use technology to automate some of your internal controls and other fraud prevention policies.  Contact us for a personal consultation.